New Markets Tax Credits (NMTC) in Commercial Real Estate

What are New Markets Tax Credits?

The New Markets Tax Credit (NMTC) is a federal tax incentive program designed to encourage investment in low-income communities. Since congress started allocating credits in 2003, the program has issued approximately $25 billion in tax credits. Specialized investment vehicles called community development entities (CDEs) compete for NMTCs, which are allocated by the U.S. Department of the Treasury. Once a CDE has been allocated NMTCs, they can award investors the tax credits. In order to qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts. In addition, most CDEs have pledged to place 75% of their investments in the most distressed census tracts, in order to increase their impact on low-income communities.

How NMTCs Work in Practice

In exchange for investing in a CDE, NMTC investors are awarded a tax credit equivalent to 39% of the equity they have invested. This credit is taken over a 7-year period, as a 5% annual credit for years 1, 2, and 3, and a 6% credit for years 4, 5, 6, and 7. A CDE can invest in itself or can receive investments from outside parties. In practice, most CDEs and investors are banks and other large financial institutions, but anyone can create a CDE and apply for NMTCs. Between 2015 and 2017, around 50% of all New Market Tax Credits were awarded to Community Development Financial Institutions (CDFIs), private financial institutions created with the goal of providing affordable financing solutions to low income individuals and economically disadvantaged businesses. In contrast, 23% of credits were allocated to mainstream lenders and banks, while 5% were allocated to for-profit financial institutions.

In 2016, CDE’s that were awarded NMTCs invested nearly $45 billion in low-income areas, created three-quarters of a million jobs, and built or improved nearly 200 million sq. ft. of commercial real estate. For the 2017-2018 tax year, the federal government awarded CDEs $3.5 billion in NMTCs, which is estimated to stimulate at least $28 billion in development.

NMTCs and Opportunity Zones

The Opportunity Zones program provides significant tax benefits to borrowers who invest in Opportunity Funds, investment vehicles which place at least 90% of their assets in Qualified Opportunity Zones (QOZs), low-income census tracts that have been certified by the U.S. Department of the Treasury. Since many NMTC-eligible census tracts are also Opportunity Zones, there is significant potential for investors to combine both tax credit programs in order to maximize their investment yield.

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